What Greece Faces if It Defaults

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By Uki Goñi

April 29, 2015

BUENOS AIRES — WHEN President Adolfo Rodríguez Saá told Congress on Dec. 23, 2001 that “the Argentine state will suspend the payment of its foreign debt,” legislators jumped to their feet with joy. Their cheering quickly morphed into a chant of “Ar-gen-ti-na! Ar-gen-ti-na!”

Today, it is Greece, led by a recently elected populist left-wing party, Syriza, that is contemplating a similarly drastic unilateral declaration of independence from foreign creditors and international financial institutions. Economists like Nouriel Roubini, a professor at New York University, have long argued that “Greece should default and abandon the euro,” using “Argentine-style measures” to prevent “a disorderly fallout.” Far from the sky falling in, they say, Argentina’s economy soon roared back to prosperity; Greece should follow suit.

But were the years that followed really so rosy for the people of Argentina?

Day 1 of the great experiment was inspiring. Mr. Rodríguez Saá received adulation when he went before Argentina’s General Confederation of Labor. “I believe in social justice,” the president declared, to ecstatic cheers. “I believe in the revolutionary passion of María Eva Duarte de Perón.”

The president invoked Evita, the unofficial saint of Argentina’s descamisados, or “shirtless ones,” to distance himself from the free-market shock doctrine of his Ferrari-driving Peronist predecessor, Carlos Menem, who was president from 1989 to 1999. Mr. Menem privatized state assets and liberalized labor laws, but failed to place any social safety net beneath the growing army of the unemployed when the downturn came.

By 2001, the nation was caught in a painful crucible of recession and inflation. To Mr. Rodríguez Saá, reneging on a seemingly insurmountable foreign debt seemed a much better idea than cutting workers’ wages and benefits. It also appealed to Argentines as a rebellious cry of independence from the conditions imposed by foreign lenders.

The sense of triumph was short-lived. A week after announcing the default, Mr. Rodríguez Saá resigned. Soon, Argentina lurched into nightmarish chaos.

Economic activity was paralyzed, supermarket prices soared and pharmaceutical companies withdrew their products as the peso lost three-quarters of its value against the dollar. With private medical insurance firms virtually bankrupt and the public health system on the brink of collapse, badly needed drugs for cancer, H.I.V. and heart conditions soon became scarce. Insulin for the country’s estimated 300,000 diabetics disappeared from drugstore shelves.

Depositors started protesting inside banks. One man went into a bank with a stick of dynamite, demanding his savings to pay for a medical operation for his seriously ill wife. Soon, most of Argentina’s banks were boarded up with thick wooden panels, on which depositors angrily banged their pots and pans.

Well-off Argentines could get around the restrictions. In back rooms, large account holders were able to unofficially withdraw thousands of dollars at a time, or even wire their savings abroad through a growing black market.

At makeshift stalls, haircuts were traded for psychoanalysis sessions, apple cakes for clothes. By early 2002, the network of clubs was enrolling tens of thousands of glum-faced members every week. When the supply of pesos dried up because of the bank freeze, some of the biggest of the barter clubs began printing their own currency, the crédito.

Eventually, Argentina did recover. By 2004, the economy was booming again under a new Peronist president, Néstor Kirchner, who stared down the International Monetary Fund and applied his own brand of economic common sense.

It may fall to the historians to decide how much of the crash was attributable to Argentina’s defiant default and how much to the irresponsible application of the Menem era free-market reforms. But the price of the default was brutal for those who lost everything, most of them from the lower middle class, who did not have the resources to survive the freeze on bank withdrawals. Many cash-strapped families were forced to sell their homes at ridiculous prices to the better off who still had access to ready money.

Greeks would do well to realize what may follow if they back a Syriza-led default and leave the eurozone. They may be stamping their feet for Prime Minister Alexis Tsipras today. Tomorrow, they could be banging their pots in protest.

Uki Goñi, a contributing opinion writer, is the author of “The Real Odessa: Smuggling the Nazis to Perón’s Argentina.”